Q: We are trying to determine the amount of distributions from a 1041 US Income Tax Return for Estates and Trust. We are currently working on the trust. The K-1’s in the Trust tax return do not show distributions. The tax return does not include a balance sheet or a M2 schedule. The beneficiaries on their personal tax returns (1040) do not show income from the Trust in Schedule E under trust. This trust hold about 25 properties and many are debt free, so there is lots of cash available to be distributed.

A: Trusts distributions are cash distributions paid to the beneficiary for various streams of income. Trusts distributions are unlike pass-through distributions, which are not associated with any taxable income stream but, rather, a lump sum payment for income tax payments and compensation.

Check Schedules B, C, and D to see if the taxpayer in question received interest income, dividend income, business income, or capital gains from the Trust. There may be a comment in the Schedule or a Statement to the Form 1040 that points out the income was from a Trust. If so, those are cash amounts. If nothing shows in Schedule E, it means the Trust did not receive any taxable income from a) Other Portfolio and Non Business Income, b) Ordinary Business Income from S Corps or Partnerships, c) Net Rental Real Estate Income, or d) Other Rental Income.

A few notes on the above:

1. The amounts listed on a beneficiary's K-1 are taxable and must be reported as taxable income on Form 1040.

2. Any deduction or credit reported on a beneficiary's K-1 should (must) be reported on Form 1040.

At this point nothing differs from a K-1 issued by an S Corp or a Partnership.

3. The amounts listed on a beneficiary's K-1 are cash amounts distributed to the beneficiary, with some possible exceptions. For example, the amount reported at Line 1 as Interest Income represents cash income received from the Trust. The same should apply to every income amount reported through Line 8 - Other Rental Income.  In this respect, the revenue amounts received from the Trust differ from the revenue amounts reported on a K-1 from a Sub S or Partnership or cash vs. non-cash. I.e., revenue amounts reported on a K-1 from a Sub S or Partnership are pro-rata shares of business taxable income and not cash amounts distributed to the owner or partners.

If the Trust does not distribute the beneficiary's revenue in cash, it must then pay the income tax associated with that revenue amount. In the world of Trusts, distributions refers to cash distributions of a specific revenue stream, e.g., interest or dividend income...or capital gains.

4. What is less clear is whether the revenue amounts reported at Lines 5 through 8 are truly cash distributions. All these revenue amounts are reported on Schedule E. For example, Line 6 reports Ordinary Business Income from either an S Corp or Partnership. The Trust may distribute cash in the full amount of the Ordinary Business Income or it may distribute the amount of cash distributed by the S Corp to the Trust. It is required, at a minimum, to distribute the amount of cash it received in the form of a distribution to the Trust. If Ordinary Business Income belonged to more than one beneficiary, the distributions would presumably be pro-rated according to relative ownership.

5. Schedule B in the Trust Form 1041 reports the amount of income that must be distributed at Line 9 and and the amount actually distributed at Line 11 - Total Distributions. Line 15 reports the Income Distribution Deduction that the Trust can take to offset all the taxable income it received and reported at Line 9 of Schedule 1041. To roughly estimate if all trust income was distributed in cash - including pass-through income form an S Corp or Partnership - there should be a close match between the amount reported at Line 11 on Schedule B - Total Distributions - and the amount reported at Line 17 on Schedule 1041, which is Adjustable Total Income.